How are MLR Targets Developed?

Service Funds, as it has been established, align financial incentives of the health plan and the provider organization. Health Plans extend Medical Loss Ratio or MLR targets to provider groups to engage them in active management of membership panels. These panel managers are called Risk Groups, and they are typically organizations that provide primary care and care coordination. But how are MLR targets established?

Step 1: Pick the Right Partners

First, insurers must segment their overall enrolled population into meaningful cohorts and identify preferred panel managers for each region. Finding the right partners is critical. The best Risk Groups will have the ability to influence physician behavior to achieve assigned MLR targets.  One thing is certain, provider organizations take many forms.  In fact, organizational design and management structure varies widely among Independent Practice Associations (IPAs), Managed Service Organizations (MSOs), and Accountable Care Organizations (ACOs).

However, some generalizations are possible. Organizations structured with predominantly affiliate models often lack the management infrastructure to effectively carry out managed care objectives. Groups with employed physicians, on the other hand, have a significantly greater capacity to respond to initiatives like coding, post-discharge follow-up and care coordination.

Step 2: Set the Target Properly

Second, each panel manager must accept a medical loss ratio target BELOW the health plan’s regional performance goal. The degree to which the insurer will be able to set a lower target will be governed by the negotiating position of the Risk Group in the market. However, when the target is properly set, as long as quality and access goals are also met, any MLR result produced by a Risk Group below its target will also help to drive the regional metric towards the health plan’s goal. If the target is above the regional goal, however, the contract fails to align incentives and will ultimately need to be terminated or renegotiated.

In the case of full risk contracts with proper targets, full bonus distribution up to the Risk Group’s target MLR should be met with enthusiasm.  Why? It means that the overall average for the plan will be moved in the desired direction.  Indeed, the performance of other excess MLR panels will be favorably offset. Furthermore, any shared savings or upside only incentive contract performing below MLR targets only enhances the positive effect on the regional plan metric.

Step 3: Make it Binding

Third, take it to the bank. When a Risk Group’s MLR performance is below target, the health plan achieves its objective. However, when the Risk Group’s MLR exceeds its target, the health plan can no longer leverage it to offset other high MLR panels, in fact the reverse it true.  To ensure the effectiveness of the target, therefore, this unfavorable risk must be hedged.  Depending on the incentive provided, a Letter of Credit or a Premium Withhold or other loss guarantee should be put in place to cement the alignment. Full risk contracts will be more likely to support this additional hedging. Further, the terms of the agreement should also provide flexibility to offset unfavorable performance against success in other arrangements with the same organization.


With these steps properly followed in contracting, finance and network teams can be left to administer what is effectively a portfolio of groups incentivized to achieve common goals. Monitoring performance, influencing attribution, and supporting Risk Groups with information and transparency are vital capabilities of that portfolio management.

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